The Next Housing Bubble

Sales and prices of homes jumped in 2012—a sign that the housing market is recovering. Not really. As it turns out, hundreds of thousands of foreclosed single-family homes are being scooped up by hedge funds and big banks—yes, the same folks who led us to a housing crash in the first place. From The New Republic:

If you’ve signed a lease in the past year, there’s a good chance your landlord wears a tailored suit and works on Wall Street. One of the hottest trends in the financial sector is known as “REO-to-rental.” Over the past couple years, hedge funds, private equity firms and the biggest banks have raised massive amounts of capital to buy distressed or foreclosed single-family homes, often in bulk, at bargain prices. Their strategy is to convert them to rental units for a while before reselling them when prices appreciate. The Wall Street firms are scooping up properties in the hardest-hit areas, promising high returns for the rental revenue streams—up to 10 percent annually—and starting bidding wars that have driven up some prices well above national averages. It’s the next Wall Street gold rush, with all the warning signs of a renewed speculative bubble.

There’s a lot of downsides to this: Some of the current gains in the housing market that are occurring right now are artificial. People who want to buy homes are finding themselves being outbid by investors with deep pockets. Even Warren Buffett, the second richest man in America, told CNBC-TV last year that if he could do it easily, he’d buy up “a couple hundred thousand” single-family homes because he believes the yield on rental investments are a good bet. Rents have been steadily rising nationwide as home prices in hard-hit areas continue to slide. And then there’s this: “…Wall Street has begun to explore the option of securitizing the rental revenue, much in the way that they used mortgage-backed securities to ramp up capital in the bubble years.” It looks like the banks have short-term memories.